A CONSUMER&#39s VIEW

This is the time of year when the high-street banks start releasing details of their student accounts in a bid to attract what are seen as potentially desirable customers.

The latest offering from Royal Bank of Scotland is one of the most competitive. There is an interest-free overdraft of up to£2,000 for 12 months and no fees on agreed overdrafts above this level. This is then transformed into an interestand fee-free loan repayable over two years.

At today&#39s interest rates, this overdraft and loan facility is worth at least£600, not to mention a free Nokia mobile phone, plus free banking even when overdrawn. The true cost of this package is probably around£1,000 at least.

This is a brilliant deal for students and nobody begrudges them the help they get from the banks. They generally have a tough time making ends meet. But who pays for this? The other customers, as can be seen from the extortionate rates charged by the big four banks on credit cards, personal loans and overdrafts, which frequently hit the 18 per cent level. How can this be justified at a time when the bank base rate is 5.25 per cent? It cannot. The banks rely on customer apathy.

Cross-subsidy has long been an issue with the high-street banks and it is going to get worse. This is dangerous for the banks and unfair on customers who will eventually vote with their feet.

There are obvious examples of cross-subsidy which have been in operation at the banks for decades. The customer who stays in credit – even if the average balance is only£10 – gets free banking and pays nothing for valuable money transmission services, no matter how many cheques they write or how much they use their debit card or ATMs.

The customer who has an overdraft not only pays a frequently extortionate rate of interest but is also lumbered with bank charges. In other words, the customer who borrows – who by definition is the profitable customer – is the one who bears the entire burden of money transmission costs. Is this fair? Clearly not.

The introduction of stakeholder pensions, which the Government hopes the banks will actively sell, will make things worse. With the maximum charge on stakeholder fixed at 1 per cent of the fund, there is no fat out of which to pay commission or cover the cost of advice. Giving advice is time-consuming and uses expensively trained staff.

But the high-street banks are gambling on the fact that, if they advise on stakeholder, a significant proportion of those they advise will take out a plan and, probably through apathy, keep it long enough for the sale to generate trail commission for the bank

Alternatively, where the individual has not taken up their Isa entitlement, the bank will be able to sell them an Isa in preference to a stakeholder, on which there is front-end commission. At the very least, they get to talk to customers and hopefully sell them something – even a remortgage.

Back in the 1970s, the banks maintained that corporate business subsidised the man in the street&#39s current account. The truth of the matter was that their accounting systems were so archaic that they could not identify what was profitable business and what was not. The reality has long been that individual customers – particularly those who need overdrafts or personal loans – are subsidising most other areas of the business.

But there are huge dangers in this approach. Sooner rather than later, the paying customers – the ones who borrow from the banks – are going to get fed up with carrying the burden of all the costs.

Cross-subsidy leaves the banks vulnerable to a new entrant offering the paying customers a better deal, as the new credit card companies issuers have done most effectively.

Can the remaining non-paying customers be persuaded to pay for the money transmission services they use but pay nothing for?

Virgin, IF, Woolwich Open Plan and Britannic Money all offer the borrowing customer a better deal than the traditional high-street banks by combining a current account with cheap mortgage borrowing – an attractive combination. Where will the big four generate profits if their borrowing customers up sticks and go elsewhere?

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